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Interest Rates Put Pressure on Lending, Limit the Liquidity of the Saudi Financial Market

Interest Rates Put Pressure on Lending, Limit the Liquidity of the Saudi Financial Market

Monday, 5 December, 2022 - 12:00
Saudi banks for the need to provide new financing liquidity to meet the needs of the lending market in the Saudi economy (AFP)

Financial specialists attributed features of liquidity scarcity in the Saudi financial and banking sector to the effects of raising interest rates and increasing the Saudi Interbank Offered Rate, or Saibor, along with the emergence of attractive investment opportunities.

According to specialists, the interest rates rose in parallel with the decline in banks’ possession of bonds, which appears as a factor in the slowdown in lending and the decrease in internal liquidity.

Last month, Fitch Ratings agency has pointed to the importance that the central bank steps in with further liquidity support.

Economic experts noted that the rise in interest rates could have negative effects on the overall economy, when looking at the slowdown in the ability to provide the private sector with loans at reasonable interest rates, while banks enjoy an attractive lending market.

The Saudi Central Bank can resort to authorized policies in this regard, by reducing the compulsory cash reserve ratio with banks. It can also raise the permitted lending ratio.

In comments to Asharq Al-Awsat, Economic Advisor, Dr. Saud Al-Mutair, said that in order to limit the rise in Saibor rates, the Saudi Central Bank should intervene by pumping cash liquidity into banks to reduce the scarcity and the rate of inter-bank lending.

While no official statement was issued by SAMA, Bloomberg’s Asharqbusiness website quoted sources as saying that the monetary authority had carried out liquidity injections through an open market policy in the past weeks to address the problem, and to help stabilize lending interest rates between banks.

These statements support Fitch agency’s reports in early November that Saudi banks were likely to request more liquidity injections from SAMA, after Saibor rose sharply in October, as lending growth continued to outpace deposit growth, to 12.5 percent and 8 percent, respectively.

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